MF Global UK clients warned on return of funds

KPMG, special administrators to the UK arm of failed futures brokerage MF Global, has warned there may not be enough money to cover all assets owed to former customers.

As at 14 December 2011, only 82%, or £594 million, of the client money balances had so far been recovered by KPMG.

KPMG said it was trying to release monies held at MF Global Holdings Group companies but that it was likely discussions with creditors would continue for some time. Of the US$250 million held through omnibus accounts with the company’s American parent, KPMG said approximately US$76 million related to clients whose monies had been segregated under UK regulator the Financial Services Authority’s client money rules. “So far none of this has been returned,” said KPMG.

MF Global filed for bankruptcy in New York on 31 October after counterparties recoiled at the disclosure of a US$6.3 billion bet on European debt. Approximately US$600 million of client funds is currently not fully accounted for. The unwinding of client positions is being further complicated by the varied liquidation policies of futures clearing houses in Europe and the US. It has also been reported widely that regulators have determined that days before the 31 October bankruptcy filing, MF Global may have moved more than US$100 million in client money to its own brokerage accounts.

To provide final client statements, KPMG is now calculating and reconciling client money entitlements, processing and reconciling underlying transaction balances.

“Our work to date has identified balances relating to certain clients that had commenced the process of being afforded protection under the FSA’s client assets rules but which had not fully completed this process by the time the special administrators were appointed.”

KPMG said it was trying to identify accounts held between the MF Global and its subsidiaries to establish the legal status of the protection afforded to clients of the company and to clients’ affiliates.

On 28 November, KPMG said clients of MF Global UK with client money claims had to submit claims by 30 March 2012. KPMG proposed to make an interim distribution of client money to claimants with agreed claims, with the intention of returning a proportion of client funds before 30 March.

Counterparties may be able to claim part of this portion if third-party institutions return enough funds and KPMG determines there is enough in the pot for the size and extent of the client pool, versus the total eligible claims thereon.

Claims are now being received and processed.

“The identification of unencumbered client assets is complex and considerable data is needed to establish an accurate position on a client by client basis,” said KPMG in a report. “The company held many classes of assets on behalf of its clients in banks and depositories in several jurisdictions. These assets were held under different terms of business, some of which passed absolute title of the assets from the clients to the company, others of which allowed for the set off of balances against other linked client balances.”

According to MF Global’s own records, as at 31 October 2011 it held about $100 million of assets on a segregated basis for its clients, but KPMG said there was “limited visibility” over these assets.

“The timely return of client assets is reliant on the clearance of failed trades and close-out values and on third-party organisations completing their own due diligence and reconciliations on accounts and balances prior to the release of the securities to clients,” said KPMG.

But the accounting firm warned that there was no certainty clients would get their money back.

“If the special administrators are able to return client assets, this will be subject to some form of indemnity,” said KPMG. “This is further complicated by the high volumes of trade activity in the days prior to the date of special administration, particularly involving clients that had commenced the process of being afforded.”

Separately, UBS has announced the hire of MF Global’s former global head of equities, Peter Forlenza, to the position of head of equities, Americas.

Based in New York, Forlenza will be responsible for the regional management of UBS’s equity franchise and driving the division’s growth strategy throughout the Americas. He will also become a member of the Swiss bank’s equities management committee.

In addition to MF Global, Forlenza has also worked at Salomon Brothers and Bank of America.

“Peter joins UBS as an outstanding leader with a strong background in investment banking and equities,” said Mike Stewart, global head of equities, UBS. “Peter’s appointment is further evidence of UBS’s continuing commitment to our team in the Americas, which is of critical importance to our global business. Peter will focus on enhancing and expanding our customer relationships to help grow the business across the Americas, and there’s an outstanding base to build on.”